Questor: this specialist bond fund yields 6.2pc but it is not as risky as that figure suggests

Income is in short supply at present. Dividends have collapsed, cash pays nothing and bond yields have been crushed by central bank action.

Well, most bond yields: in some corners of the market there is a very decent income to be made from bonds.

The TwentyFour Income fund is a good example. It’s true that its shares stand 12pc below where we tipped them in March 2018 but this does at least boost the yield for new buyers.

That yield is now 6.2pc. If the fund’s dividends are secure, that represents a very attractive alternative to “equity income” funds, cash, most other bond funds and “alternative” assets such as infrastructure.

But is the dividend safe? No one can ever say for certain. But the signs are promising.

The first thing to say is that while a high yield is a fair rough-and-ready sign of higher risk, it’s not an absolute rule. In this case the risk is kept under control by astute management, while some of the yield can be attributed to the fact that the fund’s assets tend to be illiquid. This reduces demand and hence prices, boosting yield.

The assets are not conventional bonds issued by companies or governments but “asset-backed securities”. They are often bundles of ordinary residential mortgages packaged together and sold on by the original lender.

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This may ring two alarm bells. First, investors may wonder, weren’t these the very type of concocted assets that caused so much trouble in the global financial crisis? Second, aren’t residential mortgages going to be a source of trouble in the months and years ahead as borrowers who have lost their jobs in the pandemic struggle to make repayments?

In fact, many mortgage-backed bonds held up very well in the financial crisis. And the outlook now is far from as bad as you might expect from the unemployment numbers.

This is because mortgage-backed bonds come in many flavours and with many different levels of risk. The managers of the TwentyFour fund choose carefully to ensure that risk is minimised.

In late March they wrote that, “while a period of lockdown would naturally be expected to lead to a higher level of arrears”, there were “offsets” to this.

One was that “the borrowers are typically biased away from the most susceptible to a downturn, such as those within the gig economy”; another was “the structural benefits of junior bonds: excess profit and cash reserves”; a third was “the transparency of the loan pools that allow for accurate modelling of missed payments and defaults”. None of the fund’s holdings has ever defaulted.

The managers added: “Recent announcements of government support are intended to act as an offset to further stress at a corporate and consumer level, and affordability should be further supported by likely lower rates for longer.”

Numis, the broker, said this week: “The outlook remains uncertain and there are likely to be negative headlines on fundamentals and a pickup in defaults. [However] we believe that TwentyFour Income benefits from an experienced management team that leaves it well placed to navigate this environment.”

Questor says: buy

Ticker: TFIF

Share price at close: 102.5p

Update: Law Debenture

This unusual hybrid trust last week declared the first of its new quarterly dividends, payable next month. The board said the 6.5p payment should be repeated in October and January, and its current intention was “for the full-year 2020 dividend to be at least equal to [the] 2019 dividend of 26p”. Hold.

Update: Edinburgh

This trust, whose management was recently transferred to Majedie from Invesco, last week said it would propose a dividend for the year to March 2020 of 28.65p, 2.3pc more than last year.

In view of widespread dividend cuts the board said it was “working with the manager to consider how best to give effect to [our] objective of growing dividends in excess of the rate of inflation given these circumstances, while bearing in mind [our] reserves and the importance of dividends to our shareholders”. It said its reserves were “strong”. Hold.

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